NEXT WEEK ON WALL STREET Tax loss selling and a ‘Santa Rise’ could weigh on US stocks after November’s economic collapse

NEW YORK (Reuters) – With U.S. stocks posting huge gains at the end of a volatile year, investors are looking to factors that could impact stocks in the remaining weeks of 2023, including tax-loss selling and the so-called Santa Claus. gathering.

The main catalyst for stocks will likely remain the expected path of the Federal Reserve’s monetary policy. Evidence of slowing economic growth has fueled bets that the US central bank may start cutting interest rates as early as the first half of 2024, triggering a rally that has boosted the Standard & Poor’s 500 (.SPX) 19.6% year to date. It took the index to a new closing high of the year on Friday.

Meanwhile, seasonal trends have been particularly strong this year. In September, the historically weakest month for stocks, the S&P 500 fell nearly 5%. Stocks swung wildly in October, a volatile month. The S&P 500 gained nearly 9% in November, a historically strong month for the index.

“We’ve had a strong year, but history shows that December can sometimes move at its own pace,” said Sam Stovall, chief investment strategist at research firm CFRA in New York.

Next week, investors will be watching US employment data, due on December 8, to see if economic growth continues to stabilize.

Overall, December was the second-best month for the S&P 500, with the index rising an average of 1.54% for the month since 1945, according to the CFRA. It is also the most likely month for gains, with the index up 77% most of the time, company data showed.

Research conducted by LPL Financial has shown that the second half of December tends to outperform the first part of the month. The S&P 500 rose an average of 1.4% in the second half of December in so-called Santa Claus rallies, compared with a 0.1% gain in the first half, according to an LPL analysis of market movements dating back to 1950.

However, stocks that have not performed well may face additional pressure in December from tax-loss selling, as investors unload losers to secure write-downs before the end of the year. If history is any guide, some of these stocks could rebound later in the month and into January as investors return to undervalued names, analysts said.

Since 1986, stocks that fell 10% or more between January and the end of October have outpaced the S&P 500 by an average of 1.9% over the following three months, according to Bank of America Global Research. Bank of America noted in a late October report that PayPal Holdings, CVS Health and Kraft Heinz Co are among the stocks the bank recommends buying for a tax-related bounce.

“The market’s progress has been unusually limited this year, and there is reason to believe that some sectors and stocks will really be affected until they get some relief in January,” said Samir Samana, chief global market strategist at Wells Fargo Investments. institute.

Despite the market’s significant rise year-to-date, portfolios likely contain a lot of underperforming stocks. Data from S&P Dow Jones Indices showed that nearly 72% of the S&P 500’s gains were driven by a group of giant stocks like Apple, Tesla and Nvidia, which have a significant weighting in the index.

Many other names have weakened: The equal-weight S&P 500, whose performance is not affected by big technology and growth stocks, rose about 6% in 2023.

Some worry that investor overzealousness may have already set in after November’s big rally, which spurred huge moves in some of the market’s most speculative names.

For example, shares of streaming service company Roku rose 75% in November, while shares of cryptocurrency company Coinbase Global rose 62% and Cathie Wood’s ARK Innovation Fund rose 31%, its best performance ever in years. the past five.

Michael Hartnett, chief investment strategist at BofA Global Research, said in a note on Friday that the company’s Bull & Bear contrarian index — which evaluates factors such as hedge fund positions, equity flows and bond flows — had moved out of “buy” territory for the first time since mid-January. October.

“If you catch it, there’s no need to chase it,” he wrote of the gathering.

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